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Sony Chases Apple's Magic

Even with a former Steve Jobs lieutenant driving innovation, Sony still hasn't captured its rival's cool

Sony Chief Executive Howard Stringer bristles every time he gets the question: Why can't the Japanese electronics giant be more like Apple? The maker of the iPod, iPhone, and Mac computers consistently delivers supercool gadgets that are easy to use, while Sony sells music players, TVs, and cameras that get mixed reviews and often don't even work well with other Sony (SNE) products. "Sony is a very big company," Stringer says by way of explanation. "Our toughest competitors are niche organizations."

Stringer is quick to admit, though, that Sony may face a troubled future if it can't rival Apple (AAPL) in creating simple software that makes its gadgets fun and in giving consumers easy access to music and videos. Apple's iTunes store has long made filling iPods a cinch, but Sony's consumer electronics and PlayStation divisions have only recently started to integrate their offerings with those of the company's movie studio and music label. That's one likely reason why Sony's products earn profit margins of 10% or so, compared with the 30% margins that Apple's devices command.

So Stringer went straight to the source. Three years ago, he hired Tim Schaaff, a top lieutenant of Apple CEO Steve Jobs, and created the title of senior vice-president for software development for him. Although Schaaff was expected to spend most of his time in California, he's so integral to Stringer's plan to remake Sony that he has a direct reporting line to the CEO. Schaaff's role has grown quickly, and today he also has a hand in product design, licensing, planning, and engineering. "When we brought Tim on board, it was a recognition that we needed someone whose experience crosses multiple borders," Stringer says.

A KNACK FOR KILLER PRODUCTS

Schaaff doesn't come across as an agent of change. The 48-year-old Dartmouth grad studiously avoids the press. When he speaks, he does so slowly and deliberately, giving the impression that he is reading from index cards inside his head. But at Apple, Schaaff showed a knack for translating geeky ideas into killer products. The self-taught software engineer oversaw development of Apple's QuickTime video-streaming format, which serves as the foundation of iTunes, the iPod, and the iPhone.

Stringer is clearly hoping Schaaff can seed Sony with Apple's Silicon Valley entrepreneurial culture. When the Welsh-born Stringer became Sony's first non-Japanese CEO in early 2005, he pledged to make the company "cool again." While Schaaff has made important strides toward that goal, Sony clearly needs to inject some zing into its products. On Oct. 29 the company said net earnings for the quarter ended Sept. 30 were off by 72% from the year-earlier period. The report came on the heels of a warning that profits for the year would fall by more than half, due to the strengthening yen and lackluster sales of TVs and digital cameras.

It was more evidence that after a three-year makeover, Sony is still struggling to get its groove back. Now, as consumers rein in spending, they're even less likely to buy the expensive gizmos Sony plans to unveil over the coming months. That would be a major setback for "Sony United," Stringer's program to turn the company's fractured family of products and services into a model of integration. The goal is to sell Bravia televisions that connect to the Web and download the latest Spider-Man movie, Walkman phones that offer tunes from Sony artists such as Beyoncé, and e-book devices that ask if you want to purchase that new John Grisham thriller.

Stringer has given Schaaff unprecedented freedom to conquer resistance and boost cooperation among Sony's myriad—and often warring—units. Schaaff has also served as something akin to secretary of state, working with other companies to help make Sony products more appealing. Last summer, for instance, he led a high-stakes effort to persuade Hollywood to allow downloads of films and TV shows via Sony's PlayStation 3 game console. Sony wanted to introduce the service at the annual E3 video game convention in Los Angeles in July to highlight the versatility of the PS3, which includes a Blu-ray disk player and a hard drive that can store hundreds of movies. With just six months to rally the studios, Schaaff's days became a blur of airplane lounges and conference rooms as he shuttled from Hollywood to Sony offices in California and Tokyo. But the studios held off, waiting to see whether rivals would sign up. "Nobody wants to be the only guy licensing content," Schaaff says.

"THE DOORS ARE MORE OPEN"

Finally, as workers were installing giant flat-panel televisions at Los Angeles' Shrine Auditorium for Sony's news conference, Schaaff's team started to make some real headway. Promising to include technology that would prevent users from sharing films over the Internet, Schaaff managed to convince studio executives that the PS3 network could provide a new outlet for their movies—and serve as a counterweight to Apple's growing clout in the market for downloads. At its launch on July 15, the PlayStation Network offered both rentals and purchases from six of the seven largest movie studios. To many at Sony, the deal signaled increasing cooperation among the PlayStation team in Northern California, Schaaff's group, and Sony's film division. "Today there's much closer integration between hardware and software," says Peter Dille, the Sony executive responsible for the PlayStation Network. "The doors are more open, and people are finally realizing that their phones can connect to other offices."

The result of the growing spirit of cooperation? Sony in January partnered with retailer Amazon.com (AMZN) on an online music store, called MyPlay, that lets consumers download tracks from various record labels without copy restrictions. After years of criticizing the quality of Microsoft's programs for phones and handheld devices, Sony last fall astounded the industry by scrapping its own software and online store and embracing the software giant's Windows technology for its Walkman portable media players. Then in February, it chose the Windows Mobile operating system for a new line of phones called Xperia. And since July consumers have been able to bypass Sony's online store and download content for its e-book device, the Reader, from rival Web sites. Schaaff "knows how to speak the same language as both the entertainment and technology folks," says Sony Pictures Television President Steve Mosko. "And he knows what a 16-year-old wants as well."

Despite Schaaff's successes, there's still plenty of resistance to his efforts. Some colleagues praise him for his quiet thoughtfulness, but others say he has accomplished little in his three years at the company. "He came in lecturing everybody, saying 'Well, we did it this way and this way at Apple,'" says one executive in Sony's consumer electronics division. Others grouse that Schaaff has demonstrated little of Jobs' take-charge attitude. "To expect a storm-the-castle, everyone-pulls-in-the-same direction attitude, forget it," says another executive who has worked with Schaaff.

SERIOUS ABOUT CHANGE

Sensing the opposition to his new hire, Stringer has worked to shore up Schaaff's position. At a 2006 management meeting, Stringer asked young software engineers to sit in the front. That forced some senior executives to the back, sending the message that the CEO was serious about change. And in May 2007, Stringer put Schaaff in charge of the United Service Steering Committee, a group of 30 top executives that meets monthly to air grievances and come up with ideas to boost profits.

When veterans such as PlayStation chief Ken Kutaragi balked at sharing power, Stringer didn't budge. Kutaragi was moved into a new advisory role, and he eventually resigned. Since then, Stringer has tapped executives once based in the U.S.—whom he has worked with over the years—to head up key divisions: mobile phones, PlayStation, and the fledgling digital books unit, which sells the Sony Reader. While those new faces are more willing to work with Schaaff, "Tim [still] has to do things very gently," says longtime friend Ty Roberts, a former Apple executive who is now chief technology officer at Sony subsidiary Gracenote, which maintains a database of information about virtually every music CD ever made. "Sony is not like Apple. You can't just tell people to do something. It's all about building consensus here."

It's easy to see that Stringer and Schaaff, at least, have come to a consensus on Sony's future. Sitting side by side during a breakfast meeting at Tokyo's Westin Hotel in late September—Schaaff's first press interview—the two often complete each other's sentences. "There are a lot of people who were waiting for this...," Stringer says. "To fail," Schaaff and Stringer say in unison. "Exactly," adds Schaaff.

Sometimes roadblocks have even come up on Stringer's pet projects. Early in Schaaff's tenure, Stringer started trumpeting the Reader as proof that Sony could out-Apple Apple. Meeting with engineers at Sony's sprawling U.S. consumer electronics campus nestled in the canyons near San Diego, Schaaff discovered the e-book device was hung up by infighting among rival camps. The dispute confirmed the silo mentality he had detected in his first few weeks on the job. "I was hearing, 'Sony doesn't do this and Sony doesn't do that,'" says Schaaff. "I was a little suspicious."

One group wanted to make the gadget compatible with Mac computers, but designers balked at that idea. Sony had never bothered with Apple software, they said, and there was no reason to start now. And the online bookstore remained in such a muddle that even technically savvy users were having problems finding and purchasing the titles they wanted. The Reader launched in October 2006 to a lukewarm reception with those issues unresolved.

Although the Reader won points for design, the limelight has been stolen by the Kindle, a rival device released last year by Amazon. The Kindle has been widely derided for its blocky look and feel, but analysts say it has been selling far better than Sony's Reader. A key reason is that Amazon made it simpler to download content by including a free wireless connection to its online store, while the Reader must be attached to a PC to load new books. Sony on Oct. 2 released a third-generation Reader that still lacks wireless downloads. Steve Haber, president of the e-books division, concedes the company could be nimbler but says changes are under way. "We've got a lot of good things coming," he says.

You hear the same thing from executives across the company. But will the good things come soon enough to help Stringer meet his goal of transforming Sony by 2011? While Stringer and Schaaff say they'll get there, some former Sony executives wonder when Schaaff might help the company develop anything as iconic as the iPod or iPhone. "Apple is the Sony of the 21st century," says one. "In the past two years, Sony has had plenty of time to come up with an iPhone. Why hasn't it?"

Despite the current economic turmoil, Christmas may not be a total bust for gadget makers. Consumer Electronics Assn. predicts that fourth-quarter sales of TVs, stereos, and the like will grow by 3.5%, even as overall holiday spending drops by 14%, Twice magazine reports.